Rules are for fools who follow them

Apr 25, 2005

While the authorities are busy recommending new regulations, old ones are being flouted

Every few days, we have fresh evidence that rules and regulations framed by the government apply only to those who are foolish enough to follow these. The rest flout them with abandon and make up explanations if caught.

The latest example is that of Indian Petrochemicals Corporation Ltd (IPCL), a company caught in the crossfire of the warring Ambani siblings, after Anil Ambani’s headline-grabbing resignation as its vice-chairman on January 2.

Anil Ambani had resigned on the grounds that it was beneath him to be on the same board as Mukesh’s friend, Anand Jain. The board, which met on January 20, asked him to reconsider. On January 27, Ambani submitted a detailed letter to the board raising several issues, but apparently did not mention any reconsideration of his resignation.

On April 22, exactly three months later, the media was suddenly in a tizzy when the Anil camp realised his name had been removed from the IPCL website and he was not sent the agenda for the forthcoming board meeting of April 26 to discuss the financial results. When questioned, IPCL claimed the board had noted Anil’s letter at its March 30 meeting and accepted the resignation. But the stock exchange websites have no record of the board meeting though the April 26 meeting has been duly notified. The last two notices from IPCL to the bourses were sent around March 22, and they were denials of some media report. There is no announcement of a March 30 board meeting and no intimation of an important decision like the acceptance of the vice-chairman’s resignation.

Besides, according to media reports, IPCL has, so far, not notified the Registrar of Companies about the change in board composition. Technically, it still has five days to meet the requirement, but the silence about a board meeting is clearly unacceptable for a large listed company, which claims to be so conscious about its reputation.

When M Damodaran, chairman, Securities and Exchange Board of India (Sebi), pushed back the implementation of Clause 49 of the listing agreement after his appointment, it was because the corporate sector complained bitterly about onerous compliance requirements and the lack of independent directors.

• With Sebi lacking powers to punish violators, disclosure rules are hot air

• Clause 49 is toothless; bourses can do nothing when it is brazenly flouted

• It is high time there is focus on efficacy of existing regulatory action

The irony is that Clause 49 is so toothless, there is nothing stock exchanges can do even when it is brazenly flouted. Unless the rules are changed to give Sebi some teeth to punish violators, all talk about disclosure rules is just a lot of hot air. Take a look at other instances. On April 12, the High Court of Justice, Queens Bench Division, Commercial Court of UK, decided a case against Essar Steel filed by The Agro Fund Ltd. This pertains to Essar Steel’s $75 million Euro Convertible Bond (apparently India’s first) issue in August 1993, which was restructured several times. In a nutshell, the judgement requires Essar to pay the Fund $29.5 million with interest and the judge is still to decide the interest. The shares of Essar Steel have been falling since April 13, a day after the judgement. It dropped from Rs 60 to a low of Rs 42.40 on Friday, April 22. This was partly due to the reorganisation in capital, but there is no intimation about the judgement to the bourses.

Sometimes, companies do report excise claims and lost appeals to the stock exchange, but in their own good time. For instance,

I knew about a claim of over Rs 300 crore against a high-profile company, at least six weeks before the company notified the bourses. I got the information from a highly regarded market intermediary.

A charitable explanation would be that companies are not clear what constitutes price-sensitive information. But stock exchange sources laugh away the possibility. They say companies are fully aware about disclosures rules under Clause 49 of the Listing Agreement, but they also know that unless Sebi gets tough, there is nothing the individual bourses can do, even in the most brazen cases, like that of Dinesh Dalmia.

In 2000, Dalmia increased his capital by 50% and allotted it on a preferential basis to three Overseas Corporate Bodies (OCBs), without bothering to inform the stock exchanges. He followed this by demerging all the overseas operations of DSQ Software and changing the names of those companies, as well as the Indian one. Even today, while Dalmia is absconding from the country and has an Interpol alert against him, nobody knows the exact names of DSQ Software and DSQ Biotech (although I have internal circulars intimating the staff about name changes). He then sold his most lucrative contracts to Ramesh Vangal’s Scandent Technologies, again without informing shareholders. Scan-dent is now a listed company through a reverse merger with SSI.

That’s not all. Dalmia merrily runs a BPO in Gurgaon called Allserve Systems and controls it through some loyal nominees. Although the Serious Frauds Office attached to the ministry of company affairs is allegedly investigating Dalmia’s shenanigans, it seems to be making no effort to look in its own backyard at Gurgaon. Interestingly, the Frauds Office has never made any attempt to ask for information, freely available with this columnist and some others. Recently, Vanguard Systems has allegedly acquired Allserve Systems and is seeking a Nasdaq listing.

In the last three years, Sebi has been guilty of wasting a lot of time by setting up a series of committees to debate issues such as corporate governance, central listing, governance ratings, IPO ratings and disclosure norms. Most of these recommendations have either been junked, or are still under consideration. It is probably high time that Sebi and the government focus on the efficacy of regulatory action, instead of writing new regulation when the old rules are flouted with impunity.